Testimony 

Before the Subcommittee on Antitrust, 

Competition Policy and Consumer Rights, 

Committee on the Judiciary, U.S. Senate 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:30 p.m. 

Wednesday, July 16, 2003 GROUP PURCHASING 

ORGANIZATIONS 

Use of Contracting 

Processes and Strategies to 

Award Contracts for 

Medical-Surgical Products 

Statement for the Record by Marjorie Kanof 

Director, Health Care—Clinical 

 and Military Health Care Issues 

GAO-03-998T 
The seven GPOs we studied varied in how they carried out their contracting 

processes. The GPOs were able to expedite their processes for selecting 

products to place on contract, particularly when they considered these 

products to be innovative. The GPOs also reported receiving from 

manufacturers administrative fees in 2002 that were generally consistent 

with the 3-percent-of-purchase-price threshold in regulations established by 

the Department of Health and Human Services. However, for certain 

products, they reported receiving higher fees—in one case, nearly 18 

percent. 

The seven GPOs also varied in the extent to which they used certain 

contracting strategies as leverage to obtain better prices. For example, some 

GPOs, including one of the two largest, used sole-source contracting (giving 

one of several manufacturers of comparable products an exclusive right to 

sell a particular product through the GPO) extensively, whereas others used 

it on a more limited basis. Most GPOs used some form of product bundling 

(linking price discounts to purchases of a specified group of products), and 

the two largest GPOs used bundling for a notable portion of their business. 

In response to congressional concerns raised in 2002 about GPOs' 

potentially anticompetitive business practices, the Health Industry Group 

Purchasing Association (HIGPA) and GPOs individually established codes of 

conduct. (See figure.) The conduct codes are not uniform in how they 

address GPO business practices. In addition, some GPOs’ conduct codes 

include exceptions and qualified language that could limit their potential to 

effect change. 

Figure: Business Practices Addressed in Codes of Conduct 

Business 

practice GPO A GPO B GPO C GPO D GPO E GPO F GPO G

Product selection contracting 

processes 

Contract administrative fees

 

Sole-source contracting

Bundling

 

Commitment level requirements

Contract durations

HIGPA members Non-HIGPA members

Not identified in code of conduct

Source: Codes of conduct provided by HIGPA and the seven GPOs in our study.

Identified in HIGPA code of conduct Identified in both HIGPA and individual GPO code of 

conduct

Identified in individual GPO code of conduct

Note: A code of conduct was determined to identify a business practice if it was mentioned in the 

code’s text. 

Hospitals have increasingly relied 

on purchasing intermediaries—

GPOs—to keep the cost of medicalsurgical products in check. By 

pooling purchases for their hospital 

customers, GPOs—in awarding 

contracts to medical-surgical 

product manufacturers—may 

negotiate lower prices for these 

products. 

Some manufacturers contend that 

GPOs are slow to select products 

to place on contract and establish 

high administrative fees that make 

it difficult for some firms to obtain 

a GPO contract. The 

manufacturers also express 

concern that certain contracting 

strategies to obtain better prices 

have the potential to limit 

competition when practiced by 

GPOs with a large share of the 

market. 

GAO was asked to examine certain 

GPO business practices. It focused 

on seven large GPOs serving 

hospitals nationwide regarding 

(1) their processes to select 

manufacturers’ products for their 

hospital customers and the level of 

administrative fees they receive 

from manufacturers, (2) their use 

of contracting strategies to obtain 

favorable prices from 

manufacturers, and (3) recent 

initiatives taken to respond to 

concerns about GPO business 

practices. 

www.gao.gov/cgi-bin/getrpt?GAO-03-998T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Marjorie Kanof 

at (202) 512-7114. 

Highlights of GAO-03-998T, a statement 

for the record for the Subcommittee on 

Antitrust, Competition Policy and 

Consumer Rights, Committee on the 

Judiciary, U.S. Senate 

July 16, 2003 

GROUP PURCHASING ORGANIZATIONS 

Use of Contracting Processes and 

Strategies to Award Contracts for 

Medical-Surgical Products 
Page 1 GAO-03-998T 

Mr. Chairman and Members of the Subcommittee: 

We are pleased to have the opportunity to comment on the role of group 

purchasing organizations (GPO) in the marketplace for medical-surgical 

products. Faced with persistent pressures to cut rising costs, hospitals 

over the past two decades have increasingly relied on purchasing 

intermediaries—GPOs—to keep the cost of medical-surgical products in 

check. Hospitals buy everything from commodities—for example, cotton 

balls and bandages—to high-technology medical devices, such as 

pacemakers and stents,1

 through GPO-negotiated contracts. By pooling the 

purchases of these products for their hospital customers, GPOs may 

negotiate lower prices from vendors (manufacturers, distributors, and 

other suppliers), which can benefit hospitals and, ultimately, consumers 

and payers of hospital care (such as insurers and employers). 

Some manufacturers—especially small manufacturers of medical 

devices—have contended that GPOs employ a slow process for selecting 

products to place on contract and establish high administrative fees that 

have made it difficult for some firms to obtain a GPO contract. They have 

also expressed concerns about certain contracting strategies that GPOs 

use as leverage to obtain better prices. They contend that these strategies 

have the potential to limit competition when practiced by GPOs with a 

large share of the market. 

At the request of the subcommittee, we examined certain GPO business 

practices that critics contend have the potential to create an uneven 

playing field for manufacturers. This statement focuses on seven large 

GPOs serving hospitals nationwide regarding (1) their processes to select 

manufacturers’ medical-surgical products for their hospital customers and 

the level of administrative fees they receive from manufacturers, (2) their 

use of contracting strategies to obtain favorable prices from 

manufacturers, and (3) recent initiatives taken to respond to concerns 

about GPO business practices. In a subsequent report for this 

subcommittee, we will expand our earlier work and examine the extent to 

which hospitals benefit from participation in GPOs. In April 2002, we 

 1

A stent is a device used to provide support for tubular structures like blood vessels. It can 

be made of rigid wire mesh or may be a metal wire or tube. 
Page 2 GAO-03-998T 

reported that for two products in one local market, a hospital’s use of a 

GPO contract did not guarantee that the hospital paid a lower price. 2

We focused our current work on purchases made by acute care hospitals 

for medical-surgical products, including commodities, such as cotton balls 

and bandages, and medical devices, such as pacemakers and stents.3

 We 

did not investigate GPOs’ business practices with regard to other products 

that hospitals purchase, such as pharmaceutical products, capital 

equipment, and food supplies. Our findings are based on structured 

interviews with representatives of seven major national GPOs. We also 

interviewed representatives of 13 medical-surgical product manufacturers 

of various sizes and representatives of trade associations from the 

following industries: group purchasing, medical-surgical product 

manufacturing, supply distribution, and venture capital. We also consulted 

with experts, including representatives from two hospitals, three venture 

capital firms, two industry consultants, and one technology assessment 

company. In addition, we reviewed literature on group purchasing and 

antitrust law. We did not independently verify the information we 

obtained. The information GPOs provided was self-reported. We 

conducted our work from May 2002 through July 2003 in accordance with 

generally accepted government auditing standards. 

The GPOs we studied were able to alter the duration of their process for 

selecting products to place on contract, particularly when they considered 

these products to be innovative. GPOs’ product selection processes 

generally took 6 months, and ranged from as short as 1 month to as long as 

18 months. One GPO specifically reported expediting or modifying its 

formal selection process when it considered a product to be innovative 

and wanted to award a contract quickly. The seven GPOs also reported 

receiving from manufacturers administrative fees in 2002 that were 

generally consistent with the 3-percent-of-purchase-price threshold in 

regulations established by the Department of Health and Human Services 

(HHS). However, for certain products, they reported higher fees—in one 

case, nearly 18 percent. 

 2

U.S. General Accounting Office, Group Purchasing Organizations: Pilot Study Suggests 

Large Buying Groups Do Not Always Offer Hospitals Lower Prices, GAO-02-690T

(Washington, D.C.: Apr. 30, 2002). 

3

We did not include government hospitals, such as those of the Department of Veterans 

Affairs, in our study. 

Results in Brief 
Page 3 GAO-03-998T 

The seven GPOs we studied, including two with the largest market shares, 

used sole-source contracting (giving one of several manufacturers of 

comparable products an exclusive right to sell a particular product 

through a GPO), product bundling (linking price discounts to purchases of 

a specified group of products), and other contracting strategies to varying 

degrees to obtain favorable prices. For example, while all seven GPOs 

reported using sole-source contracts, some GPOs, including one of the two 

largest, used them extensively, whereas others used them on a more 

limited basis. Most GPOs used some form of bundling, and the two largest 

GPOs used either contracts or programs that bundle multiple products for 

a notable portion of their business. 

In response to congressional concerns raised in 2002 about GPOs’ 

potentially anticompetitive business practices, the group purchasing 

industry’s trade association established a code of conduct that directs 

member GPOs to, among other things, address their contracting processes. 

The conduct code also includes reporting and education responsibilities 

for the trade association. The seven GPOs we studied drafted or revised 

their own codes of conduct, but the conduct codes are not uniform in how 

they address GPO business practices. Moreover, some GPOs’ conduct 

codes include exceptions and qualified language that could limit the 

potential of the conduct codes to effect change. It is too soon to evaluate 

the effectiveness of these codes of conduct in addressing concerns about 

potentially anticompetitive practices, as many conduct codes are recently 

adopted and sufficient time has not elapsed for GPOs to demonstrate 

results. 

In seeking to provide their hospital customers with medical-surgical 

products at favorable prices, GPOs engage with manufacturers in certain 

contracting processes and sometimes use certain strategies to obtain price 

discounts. Many manufacturers bid for GPO contracts because hospital 

purchases with these contracts may increase manufacturers’ market share. 

GPOs are subject to federal antitrust laws. A statement developed by 

enforcement agencies helps GPOs determine whether their business 

practices are likely to be challenged under the antitrust laws. 

Many manufacturers use GPO contracts to sell their medical-surgical 

products. These products include two types—commodities and medical 

devices. Commodities such as cotton balls and bandages are examples of 

items for which physicians and other clinicians generally do not have 

strong preferences. Manufacturers commonly use GPO contracts to sell 

Background 

Manufacturers Contract 

with GPOs to Sell Their 

Medical-Surgical Products 
Page 4 GAO-03-998T 

hospitals these non-preference products because hospitals purchase these 

items in large quantities. In contrast, medical devices can be “clinical 

preference” items—that is, those for which physicians and other 

practitioners are likely to express a preference. High-technology medical 

devices such as pacemakers and stents are examples of clinical preference 

items. Some manufacturers prefer to sell these items directly to hospitals. 

The GPO industry that purchases products for hospitals is large and 

moderately concentrated. Experts have not determined a precise number 

of GPOs currently in business, but some estimate that there are hundreds 

of GPOs. While some GPOs operate regionally, this study focused on seven 

national GPOs with purchasing volumes over $1 billion that account for 

more than 85 percent of all hospital purchases nationwide made through 

GPO contracts. In 2002, the combined purchasing volume of these GPOs 

totaled about $43 billion, excluding distribution dollars. (See table 1.) 

Table 1: Seven GPOs’ Purchasing Volumes for Total Customer Purchases Made 

through Contracts, 2002 

GPO Purchasing volume (dollars in millions)

GPO 1 $14,330

GPO 2 14,413

GPO 3 4,400

GPO 4 3,233

GPO 5 2,837

GPO 6 2,564

GPO 7 1,466

Total $43,243

Source: GPO-reported data. 

Note: These purchasing volumes exclude distribution dollars. 

Among the GPOs in our study, the two largest GPOs account for about 66 

percent of total GPO purchasing volume for all medical products 

(including, among other things, medical-surgical products, 

pharmaceuticals, capital equipment, and food). These two GPOs also 

account for 70 percent of the seven GPOs’ total medical-surgical product 

volume. One of the two largest GPOs has as members 1,569 of the nation’s 

A Few GPOs Dominate the 

Market for MedicalSurgical Products Sold 

through Contracts 
Page 5 GAO-03-998T 

approximately 6,900 hospitals; the other has 1,469 hospital members.4 One 

of the two largest GPOs permits its members to belong to other national 

GPOs, whereas the other largest GPO does not. 

A GPO’s contracting process for manufacturers’ medical-surgical products 

generally includes several phases—namely, product identification and 

selection, requests for proposals or invitations to bid, review of submitted 

proposals and applications, assessment of product quality, contract 

negotiation, and contract award. The contract negotiation phase may 

include the negotiation of a contract administrative fee. This fee is 

designed to cover a GPO’s operating expenses and serves as its main 

source of revenue.5

 Contract administrative fees are calculated as a 

percentage of each customer’s purchases of the particular product 

included in a GPO contract. 

In negotiating contracts, GPOs use certain contracting strategies as 

incentives for manufacturers to provide deeper discounts and for hospital 

members to concentrate purchasing volume to obtain better prices. These 

strategies are not limited to use by GPOs, as some manufacturers also use 

them in negotiating contracts with GPOs to increase market share. Key 

contracting strategies include the following: 

• Sole-source contracts give one of several manufacturers of comparable 

products an exclusive right to sell a particular product through a GPO. 

• Commitment refers to a specified percentage of purchasing volume that, 

when met by the GPO’s customer (such as a hospital), will result in a 

deeper price discount. Commitment levels can be set either by the GPO or 

the manufacturer. For example, a manufacturer might offer greater 

discounts to GPO customers that purchase at least 80 percent of a certain 

group of products from that manufacturer. Commitment requirements can 

also be tiered, resulting in the opportunity for the customer to commit to 

different percentages of purchasing volume: the higher the percentage, the 

lower the price. 

 4

The approximately 6,900 hospitals include government hospitals such as those of the 

Department of Veterans Affairs and county hospitals. 

5

In addition to using these fees to cover their operating expenses, GPOs often distribute 

surplus fees to member hospitals. They may also use administrative fees to finance new 

ventures, such as electronic commerce, that are outside their core business. 

GPOs’ Business Practices 

Encompass Contracting 

Processes and Strategies 
Page 6 GAO-03-998T 

• Bundling links price discounts to purchases of a specified group of 

products. GPOs award several types of bundling arrangements. One type 

bundles combinations of products from one manufacturer. A manufacturer 

may find this arrangement advantageous because it allows increased sales 

of products in the bundle that may not fare well as stand-alone products. 

Another type bundles products from two or more manufacturers. Also, 

contracts can be bundled for complementary products, such as protective 

hats and shoe coverings used in hospital operating rooms, while others 

bundle unrelated products such as patient gowns and intravenous 

solutions. Hospitals that purchase bundles of unrelated products receive a 

price discount on all products included in the bundle. 

• Contracts of long duration—those in effect for 5 years or more—can 

direct business to manufacturers for an extended period. 

When used by GPOs with a large market share, these contracting 

strategies have the potential to reduce competition. For example, if a large 

GPO negotiates a sole-source contract with a manufacturer, the contract 

could cause an efficient, competing manufacturer to lose business and exit 

from the market and could discourage other manufacturers from entering 

the market. 

Certain aspects of GPOs’ operations are specifically addressed by federal 

statute, regulation, and policy. While “anti-kickback” provisions of the 

Social Security Act prohibit payments in return for orders or purchases of 

items for which payment may be made under a federal health care 

program, the act also contains an exception for amounts paid by vendors 

of goods or services to a GPO.6

 Therefore, GPOs are allowed to collect 

contract administrative fees from manufacturers and other vendors that 

could otherwise be considered unlawful. In addition, regulations issued by 

the Department of Health and Human Services establishing “safe harbors” 

for purposes of the “anti-kickback” provisions provide that GPOs are to 

have written agreements with their customers either stating that fees are 

to be 3 percent or less of the purchase price, or specifying the amount or 

maximum amount that each vendor will pay.7

 The GPOs must also disclose 

in writing to each customer, at least annually, the amount received from 

each vendor with respect to purchases made by or on behalf of the 

 6

See 42 U.S.C. § 1320a-7b(b) (2000). 

7

See 42 C.F.R. § 1001.952(j) (2002). 

Federal Safe Harbor and 

Antitrust Safety Zone Exist 

for GPOs 
Page 7 GAO-03-998T 

customer. The Office of Inspector General in the Department of Health 

and Human Services is responsible for enforcing these regulations. 

Recognizing that GPO arrangements may promote competition among 

manufacturers and yield lower prices in some cases and may reduce 

competition in other cases, the U.S. Department of Justice and the Federal 

Trade Commission issued a statement in 1993 for joint purchasing 

arrangements. This statement sets forth an “antitrust safety zone”8

 for 

GPOs that meet a two-part test, under which the agencies will not 

generally challenge GPO business practices under the antitrust laws. 

Essentially, the two-part test in the context of medical-surgical products is 

as follows: (1) purchases through the GPO account for less than 35 

percent of the total sales of the product in the relevant market,9

 and (2) the 

cost of the products purchased through the GPO accounts for less than 20 

percent of the total revenues from all products sold by each GPO member. 

In recent years, some manufacturers of medical-surgical products have 

contended that GPOs employ a slow product selection process and set 

high administrative fees that have made it difficult for some firms to obtain 

GPO contracts. These firms tend to be small manufacturers that may have 

fewer financial resources available to successfully complete GPOs’ 

contracting processes than large manufacturers. The GPOs we studied 

reported generally having contracting processes that can be modified for 

certain types of products. They also reported receiving from 

manufacturers administrative fees that were generally consistent with 

federal regulations established by HHS. 

 8

Statements of Antitrust Enforcement Policy in Health Care, Statement 7, p. 23. 

9

Although the GPOs in this study each has less than 35 percent of total GPO purchasing 

volume for all medical products, it is possible, for example, that a GPO could have greater 

than 35 percent of the total sales of one or more particular products. 

GPOs Reported 

Modifying Contracting 

Processes When 

Desirable and 

Receiving 

Administrative Fees 

That Were Generally 

Consistent with 

Federal Regulations 
Page 8 GAO-03-998T 

In discussing GPOs’ selection of products and negotiation of fees, several 

manufacturers we contacted pointed to the paperwork and duration of 

these processes as burdensome. Not all manufacturers shared the same 

perspective. One small manufacturer commented that the process could 

sometimes be relatively easy but that the selection process can be more 

difficult if the manufacturer is selling only one product. 

The GPOs we studied were able to alter the duration of their process for 

selecting products to place on contract, particularly when they considered 

these products to be innovative. Based on their reported information, 

GPOs’ product selection processes generally took 6 months, and ranged 

from as short as 1 month to as long as 18 months. One GPO specifically 

reported expediting or modifying its formal selection process when it 

considered a product to be innovative and wanted to award a contract 

quickly. Most GPOs did not have a distinctly separate process for selecting 

innovative technology but reported that these products were generally 

selected in a shorter amount of time compared with other products. 

Figure 1 shows, across the seven GPOs, the average minimum, most 

frequent, and maximum times taken for product selection. 

GPOs Reported Expediting 

Reviews and Using a 

Public Solicitation Process 

for Certain Products 
Page 9 GAO-03-998T 

Figure 1: Duration of the GPO Product Selection Process 

Note: Averages weighted by GPO-reported dollar purchasing volume, excluding distribution dollars. 

The GPOs in our study reported consulting various sources before making 

a decision, including the GPO’s customers requesting the product; 

published studies about the product; internal and external technology 

assessments; and different manufacturers of the product, both with and 

without a GPO contract. In all cases, the GPOs cited customer requests for 

products as the most important factor in identifying which products to 

place on contract. 

In selecting a manufacturer, six of the seven GPOs, including the two 

largest, solicit proposals publiclyeither through requests for proposals 

or requests for bids through their Web sites. The extent to which these 

processes are open to all manufacturers varies by GPO and by product. 

For example, one of the GPOs solicits proposals publicly for clinical 

preference products, but not for commodities. 

0

2

4

6

8

10

12

14

Average

minimum 

length 

of selection 

process

Average 

most frequent 

length 

of selection 

process

Average

maximum 

length 

of selection 

process

Months

Innovative products

Other medicial-surgical products

Source: Interviews with representatives of seven GPOs.
Page 10 GAO-03-998T 

GPO-reported information on new contracts awarded in 2002 suggest that 

GPOs’ solicitations were not limited to manufacturers already on contract. 

Nearly one-third of all the newly negotiated contracts awarded by the 

seven GPOs in 2002 were awarded to manufacturers with which the GPO 

had not previously contracted. The percentage of such contracts ranged 

from 16 percent to 55 percent for the GPOs in our study. For the two 

largest GPOs, this share was 29 percent and 55 percent. We could not 

determine, from the information provided, whether these first-time 

contract awardees were, for example, small manufacturers or companies 

new to the industry or whether the products purchased through these 

contracts were clinical preference items or commodities. 

Manufacturers have expressed concerns that contract administrative fees, 

which are typically calculated as a percentage of each customer’s 

purchase of products under contract, can be too high for some 

manufacturers. These fees, combined with lower prices negotiated by the 

GPO, may decrease revenue for manufacturers and may make it more 

difficult to obtain a GPO contract for newer and smaller manufacturers 

with fewer financial resources than for larger, more established 

companies. 

Five out of seven GPOs reported that the maximum contract 

administrative fee received from manufacturers in 2002 did not exceed the 

3-percent-of-purchase-price threshold contained in federal regulations 

established by HHS. The most frequent administrative fee level that 4 out 

of 7 GPOs received from manufacturers in 2002 was 2 percent; the lowest 

fee level received by each GPO was 1 percent or less. Except for one of the 

two largest GPOs, the GPOs reported that they have not negotiated any 

new or renewed contracts in 2003 that include administrative fees from 

medical-surgical product manufacturers that exceed 3 percent. 

In 2002, fee levels for private label products —products sold under a 

GPO’s brand name—were an exception: The typical contract 

administrative fee paid by private label manufacturers was 5 percent. For 

one of the two GPOs in our study with private label products, the 

maximum administrative fee was nearly 18 percent. In addition to an 

GPO-Reported Information 

Indicates That Contract 

Administrative Fees 

Received Were Generally 

Consistent with Federal 

Regulations 
Page 11 GAO-03-998T 

administrative fee, the other GPO charged a separate “licensing” fee for 

private-label products.10

GPOs use certain contracting strategies—which include sole-source 

contracts, product bundling, and extended contract duration—to obtain 

discounts from manufacturers in exchange for providing the manufacturer 

with increased sales from an established customer base. Manufacturers 

and other industry observers have expressed concerns that use of these 

strategies by the two largest GPOs can reduce competition. For example, 

when GPOs with substantial market shares award long-term sole-source 

contracts to large, well-established manufacturers, some newer, singleproduct manufacturers—left to compete with other manufacturers for a 

significantly reduced share of the market—may lose business and be 

forced to exit the market altogether. 

The seven GPOs we studied, including two with the largest market shares, 

used these contracting strategies to varying degrees. For example, while 

all study GPOs reported using sole-source contracts, some GPOs, 

including one of the two largest GPOs, used it extensively, whereas others 

used it on a more limited basis. GPOs also varied in their approach to 

requiring commitment levels from their customers. With respect to 

bundling, most GPOs used some form of bundling, and the two largest 

GPOs used either contracts or programs that bundled multiple products 

for a notable portion of their business. With respect to contract duration, 

the two largest GPOs typically negotiated longer contract terms than the 

other five GPOs. 

The use of sole-source contracting by the study GPOs varied widely with 

respect to the relative amount of sole source contracting they did and the 

types of products included in the contracts. For five of the GPOs, solesource contracts accounted for between 2 percent and 46 percent of their 

medical-surgical product dollar purchasing volume.11 For the rest—the two 

largest GPOs—the shares of dollar purchasing volume accounted for by 

sole-source contracts were 19 percent and 42 percent. Such levels of sole-

 10Some manufacturers pay this GPO licensing fees in exchange for using the GPO’s brand 

name. 

11One GPO did not provide us information on purchasing volume for medical-surgical 

products through sole-source contracts. 

Seven National GPOs 

Varied in the Extent 

to Which They Used 

Certain Contracting 

Strategies 

For Some of the GPOs, 

Sole-Source Contracts 

Accounted for a 

Substantial Portion of the 

Purchasing Volume 
Page 12 GAO-03-998T 

sourcing are worth noting, given the sizeable market shares of these two 

GPOs. 

GPOs also varied in their use of sole-source contracts for commodity 

products as compared to medical devices for which providers may desire a 

choice of products. Six of the seven GPOs in our study reported their use 

of sole-source contracts for commodity products as compared to clinical 

preference product. For one of the two largest GPOs, clinical preference 

products accounted for the bulk—82 percent—of its sole-source dollar 

purchasing volume.12 Two GPOs reported cases in which manufacturers 

refused to contract with the GPO unless they were awarded a sole-source 

contract. In contrast, commodities accounted for the bulk—between 62 

percent and 91 percent—of the dollar purchasing volume that the smaller 

of the seven GPOs purchased through sole-source contracts. GPOreported data indicate that the proportion of contracts that were sole 

source, as a share of all contracts for medical-surgical products for the 

past 3 years, remained relatively consistent for GPOs. 

The seven GPOs in our study reported that hospital customers’ 

commitment to purchase a certain percentage of their products through 

GPO contracts was an important factor in obtaining favorable prices with 

manufacturers, and all reported establishing commitment level 

requirements to some degree. Most of the smaller of the seven GPOs 

reported that customer adherence to commitment levels and contracts 

were the most important factor in obtaining favorable pricing with 

manufacturers. In principle, for GPOs with a smaller customer base, the 

assurance of customer commitment to purchasing helps enable them to 

achieve the higher volumes needed to leverage favorable prices from 

manufacturers. The two largest GPOs reported that volume was the most 

important factor for obtaining favorable prices and that customer 

compliance with commitment level and contracts was next in importance. 

For the two largest GPOs, a sizable customer base may provide the volume 

levels needed to obtain favorable prices. 

GPOs varied in their approach to requiring purchasing commitment levels. 

One GPO requires customers to commit to an overall average dollar 

purchasing level of 80 percent for those products available through the 

 12One of the two largest GPOs in our study did not provide us information on sole-source 

purchases represented by the two product types. 

GPOs Considered 

Customer Commitment to 

Be Important, but 

Commitment 

Requirements Varied 
Page 13 GAO-03-998T 

GPO, although the percentage could vary for individual products. The GPO 

reported terminating the membership of at least one customer that did not 

meet this target. Other GPOs reported establishing customer commitment 

levels in certain contracts in order to obtain a certain price level, but 

customers were not required to buy under the contract or buy at the 

commitment level in order to retain GPO membership. Some GPOs’ 

contracts include multiple, or tiered commitment levels so that customers 

can choose from a range of commitment levels and obtain price discounts 

accordingly. 

All but one of the GPOs in our study reported using some form of 

bundling, including the bundling of complementary products, bundling 

several unrelated products from one manufacturer, and bundling several 

products for which there are commitment-level requirements. One 

bundling arrangement that GPOs reported using gave customers a 

discount when they purchased a bundle of complementary products, such 

as protective hats and shoe coverings. Four GPOs reported bundling 

complementary products. These bundles were included in a small 

percentage of the GPOs’ contracts; each of the four GPOs reported having 

no more than three contracts that bundle complementary products. One 

GPO reported awarding only one bundling arrangement for two 

complementary products—the only bundling arrangement the GPO had in 

effect at the time it reported to us. 

A second type of bundling reported by three GPOs, including the two 

largest, gave customers a discount if they purchased a group of unrelated 

products from one manufacturer. We define this type of bundling as a 

corporate agreement. One of the two largest GPOs reported that corporate 

agreements for medical-surgical products accounted for about 40 percent 

of its dollar purchasing volume for medical-surgical products under 

contracts in effect on January 1, 2003. 

Four GPOs, including one of the two largest, used a third type of 

arrangement that typically bundled products from different manufacturers 

and required customers that chose this arrangement to purchase a certain 

minimum percentage from the product categories specified in the bundle 

in order to obtain the discount. We defined this type of bundling as a 

structured commitment program. A structured commitment program 

available through one GPO bundled brand name and GPO private label 

items for 12 product categories and had a 95 percent commitment-level 

requirement. In 2002, one of the two largest GPOs reported receiving 

Most GPOs Use Some 

Form of Bundling, and the 

Two Largest GPOs Use It 

for a Notable Portion of 

Their Business 
Page 14 GAO-03-998T 

about 20 percent of its medical-surgical dollar purchasing volume from its 

structured commitment programs. 

The use of bundling arrangements may be declining. For example, data 

reported by one GPO showed a decline in the percent of its contracts that 

were corporate agreements from 2001 to 2003.13 This trend was consistent 

with comments made by one manufacturer and two medical-surgical 

product distributors. The manufacturer told us that GPOs are less 

interested in bundling different manufacturers together. Two distributors’ 

representatives told us that since the summer of 2002, GPOs have fewer 

bundling arrangements and that some bundles were “pulled apart.” 

Our analysis of data reported by the study GPOs showed that, in 2002, the 

two largest GPOs typically awarded 5-year contracts, whereas the other 

five GPOs typically awarded 3-year contracts. For some of these contracts, 

potential renewal periods constitute a portion of the contract duration. 

Those contract terms remained fairly consistent between 2001 and 2003, 

although two of the five GPOs reported that their most frequent contract 

term declined by about 1 year. Some GPOs reported implementing policies 

that may lead to a future reduction in contract terms. One of the two 

largest GPOs began in the first quarter of 2003 to exclude from new 

contracts the option for two 1-year contract extensions, so that when a 

contract expires, this GPO will solicit proposals for a new contract. 

In response to congressional concerns raised in 2002 about GPOs’ 

potentially anticompetitive business practices, the group purchasing 

industry’s trade association established a code of conduct that directs 

member GPOs to, among other things, address their contracting processes. 

The conduct code also includes reporting and education responsibilities 

for the trade association. The seven GPOs we studied drafted or revised 

their own codes of conduct, but the conduct codes are not uniform in how 

they address GPO business practices. Moreover, some GPOs’ conduct 

codes include exceptions and qualified language that can limit the 

potential of the conduct codes to effect change. It is too soon to evaluate 

the effectiveness of these codes of conduct in addressing concerns about 

potentially anticompetitive practices, as many conduct codes are recently 

 13This period reflects contracts in effect on three dates—January 1, 2001, January 1, 2002, 

and January 1, 2003. 

The Two Largest GPOs 

Typically Award Contracts 

with Longer Terms Than 

the Other Five 

GPOs Have Taken 

Initiatives to Address 

Concerns about 

Business Practices, 

but It Is Too Early to 

Evaluate Their Efforts 
Page 15 GAO-03-998T 

adopted and sufficient time has not elapsed for GPOs to demonstrate 

results. 

On July 24, 2002, the Health Industry Group Purchasing Association 

(HIGPA) adopted a code of conduct providing principles for GPO business 

practices. HIGPA represents 28 U.S.-based GPOs—including five of the 

seven major GPOs that we studied. HIGPA members also include health 

care systems and alliances, manufacturers, and other vendors. The HIGPA 

code of conduct principles address GPO business practices and actual, 

potential, or perceived conflicts of interest. Among other things, the 

HIGPA code of conduct provides that GPOs 

• allow hospital and other provider members to purchase clinical preference 

items directly from all vendors, regardless of whether the vendors have a 

GPO contract; 

• implement an open contract solicitation process that allows any interested 

vendor to seek contracts with the GPO; 

• participate in processes to evaluate and make available innovative 

products; 

• address conflicts of interest, such as disallowing staff in positions of 

influence over contracting to hold equity interest in, or accept gifts or 

entertainment from, “participating vendors”;14 and 

• establish accountability measures, such as appointing a compliance officer 

and certifying annually that the GPO is in compliance with the HIGPA 

code. 

The HIGPA code also includes several provisions regarding the trade 

association’s education and reporting responsibilities, including 

• assessing and updating the code of conduct to be consistent with new 

developments and best business practices; 

 14Participating vendors are those that have a contract or submit a bid or offer to contract 

with a GPO. 

Trade Association Code of 

Conduct Laid Groundwork 

for Industry SelfRegulation 
Page 16 GAO-03-998T 

• implementing industry wide educational programs on clinical innovations, 

contracting strategies, patient safety, public policy, legal requirements, and 

best practices; 

• making available a Web-based directory that posts manufacturers’ and 

other vendors’ product information; and 

• publishing an annual report listing GPOs that have certified their 

compliance for the year with the HIGPA code of conduct. 

As of May 19, 2003, HIGPA’s 28 U.S.-based GPO members certified that 

they are in compliance with the HIGPA code of conduct principles. 

Although the HIGPA code of conduct laid the groundwork for many GPOs 

to change their business practices, its guidelines do not comprehensively 

address certain business practices. Specifically, the HIGPA code of 

conduct requires GPOs to address business practices associated with 

contracting, conflicts of interest, and accountability, and it grants GPOs 

discretion in using contracting strategies. It recommends that GPOs 

consider factors such as vendor market share, GPO size, and product 

innovation when using multiple contracting strategies. However, the 

HIGPA code of conduct does not directly address levels of contract 

administrative fees or the offering of private label products. 

Since August 2002, the seven GPOs we studied, even those that were not 

HIGPA members, drafted and adopted their own codes of conduct or 

revised their existing conduct codes. One GPO stated that its revised code, 

while consistent with the HIGPA code, was more specific than HIGPA’s 

principles, particularly in the GPO’s rules on stock ownership, travel, and 

entertainment. Another GPO reported expanding on HIGPA’s code by 

including provisions to cap administrative fees and prohibit bundling. 

Similarly, GPOs who were not HIGPA members said they had revised their 

existing codes of conduct and that their conduct codes were in some 

respects stronger than HIGPA’s. 

Nevertheless, GPOs’ individual codes of conduct varied in the extent to 

which they addressed GPOs’ business practices, such as contracting 

processes and strategies. Figure 2 provides an overview of the seven 

GPOs’ conduct codes with respect to their business practices. The table 

indicates whether a business practice was identified in a code of conduct, 

but not how the practice was to be addressed. 

Variations Exist in GPOs’ 

Efforts to Address 

Business Practices 
Page 17 GAO-03-998T 

Figure 2: Business Practices Identified in GPOs’ Codes of Conduct 

Note: A code of conduct was determined to identify a business practice if it was mentioned in the 

conduct code’s text. 

Business 

practice GPO A GPO B GPO C GPO D GPO E GPO F GPO G

 

Product selection 

contracting 

processes

Innovative 

product 

selection

 

Contract 

administrative 

fees

Solesource 

contracting

Bundling

 

Commitment 

level 

requirements

 

Contract 

durations

Private 

labeling

Conflicts of 

interestequity

Conflicts of 

interestother

Internal 

accountability

External 

accountability

HIGPA 

members

Non-HIGPA 

members

Identified in HIGPA code of conduct

Identified in both HIGPA and individual GPO code of conduct

Identified in individual GPO code of conduct

Not identified in code of conduct

Source: Codes of conduct provided by HIGPA and the seven GPOs in our study.
Page 18 GAO-03-998T 

As figure 2 shows, the conduct codes of all the study GPOs explicitly 

mentioned conflict of interest issues such as those dealing with equity 

holdings and other conflicts such as receipt of gifts and entertainment and 

the need for internal accountability. In addition, the conduct codes of most 

GPOs, including the two largest, included provisions dealing with the 

contracting strategies, such as sole-source contracting and bundling. For 

GPOs that are HIGPA members, the lack of additional provisions in their 

individual conduct codes for certain business practices such as 

contracting processes may not be significant, as provisions covering these 

areas are included in the HIGPA code. However, for one of our study 

GPOs that is not a HIGPA member, the conduct code lacked any 

provisions pertaining to contracting processes, product selection, 

administrative fees, sole-source contracting, commitment level 

requirements, contract duration, and private labeling. 

The code of conduct provisions for the GPOs in our study were not 

uniform in how they addressed business practices. For example: 

• Four GPOs, including one of the two largest, had unqualified provisions 

for capping administrative fees at the 3-percent threshold contained in 

federal regulations established by HHS. The other largest GPO had a 

provision for capping administrative fees at 3 percent only for clinical 

preference items and only for contracts awarded after the establishment of 

the GPO’s conduct code. 

• Four conduct codes had provisions limiting the use of sole-source 

contracts for clinical preference items specifically. Another conduct code 

limited the use of sole-sourcing to contracts meeting certain criteria, such 

as approval for use by a 75-percent majority of the GPO’s contracting 

committee. The language of one of the remaining GPO’s conduct codes 

was vague with respect to sole-sourcing, stating that the GPO will provide 

customers with choices for each product or service, without explicitly 

mentioning the use of sole-source contracts. 

• In their conduct codes, two GPOs had provisions prohibiting the practice 

of bundling of unrelated products, two GPOs prohibited and two limited 

bundling for clinical preference items, and three GPOs prohibited the 

practice of bundling products from different manufacturers. One GPO’s 

conduct code stated that the GPO would not obligate its customers to 

purchase bundles of unrelated products, allowing the possibility for 

bundles to be available to customers on a voluntary basis. 
Page 19 GAO-03-998T 

Exceptions and qualified language in the provisions have the potential to 

weaken the codes of conduct. Table 2 shows examples of exceptions and 

qualified language that can limit the potential of the individual GPOs’ 

conduct codes to effect change. 

Table 2: Examples of Exceptions and Qualifications in Code of Conduct Provisions for the GPOs in Our Study 

Business practice 

Specific provision including exceptions and 

qualifiers (in italics) Potential implications 

Product selection 

contracting processes 

Will use public request for proposal process for clinical 

preference products but not for most commodities. 

Contract bids for most commodities will not go 

through public solicitation process. 

Contract administrative 

fees 

Will reduce contract administrative fees that are 

greater than 3 percent to 3 percent for clinical 

preference products on a prospective basis. 

For clinical preference products, contract 

administrative fees negotiated prior to adoption 

of conduct code are not subject to provision; in 

future contracts, administrative fee for all other 

items may continue to exceed 3 percent. 

Sole-source contracting No sole-source contracts for clinical preference 

products unless there is no other means by which the 

GPO can obtain access to the product for customers. 

Manufacturers have incentives to link price 

discounts in return for exclusive contract 

awards. 

Bundling No bundling of clinical preference products on a 

prospective basis, and no bundling of products across 

different vendors. 

For clinical preference products, bundled 

contracts awarded prior to adoption of conduct 

code are not subject to provision; contracts for 

bundles of unrelated, non-clinical preference 

products with one manufacturer are not subject 

to the provision. 

Commitment level 

requirements 

No commitment level requirements for clinical 

preference products, on a prospective basis. 

For clinical preference products, commitment 

levels negotiated prior to adoption of conduct 

code are not subject to provision; all other 

products could have commitment requirements. 

 Commitment level requirements not to exceed 80 

percent of purchasing volume for clinical preference 

products, unless relevant committee approves 

otherwise. 

Commitment-level requirements for clinical 

preference products have potential to remain as 

high as 80 percent of purchasing volume and, 

under certain circumstances, may be higher. 

Conflicts of interest-equity No equity interests may be held by GPO management 

and other staff with influence over contracting in any 

participating vendors. 

Other GPO staff may hold equity interest in 

participating vendors, that is, those on contract 

or bidding for a contract. 

GPO staff with influence over contracting may 

hold equity interest in nonparticipating vendors. 

Source: Individual GPOs’ codes of conduct. 

Given the individual GPOs’ relatively recent adoption of codes of 

conduct—since August 2002—sufficient time has not yet elapsed for GPOs 

to develop a history of compliance with certain conduct code provisions. 

Two of the manufacturers and two distributors we interviewed reported 

noticing improvements, stating that some GPOs are no longer using 

certain contracting strategies. This observation is consistent with the 

suggestion that the use of bundling may be declining. One manufacturer 

Too Soon to Evaluate 

Impact of GPOs’ Codes of 

Conduct 
Page 20 GAO-03-998T 

that had difficulty in obtaining a contract with a large national GPO prior 

to 2002 said it has since been awarded a contract for a clinical preference 

item. The manufacturer also noted that, since September 2002, it has been 

awarded several new contracts. However, two other manufacturers told us 

they are skeptical that improvements have been made with regard to 

business practices. Notwithstanding such anecdotal evidence, because of 

the recency of GPOs’ actions taken, the ability to assess the impact of the 

conduct codes systematically remains limited. One year is not sufficient 

time for the codes of conduct to produce measurable trends that could 

demonstrate an impact on the industry. 

For more information regarding this statement, please contact Marjorie 

Kanof at (202) 512-7101. Hannah Fein, Mary Giffin, Kelly Klemstine, Emily 

Rowe, and Merrile Sing made key contributions to this statement. 

Contact and 

Acknowledgments 

(290198) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability of the

federal government for the American people. GAO examines the use of public 

funds; evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good 

government is reflected in its core values of accountability, integrity, and 

reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web 

site daily. The list contains links to the full-text document files. To have GAO email this list to you every afternoon, go to www.gao.gov and select “Subscribe to 

e-mail alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to

a single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and

Testimony 

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Public Affairs